Q3 2024 Schrödinger Inc Earnings Call
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Madison: Thank you for standing by welcome to <unk> Conference call to review, our third quarter 2024 financial results. My name is Madison and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, you will have the opportunity to ask questions. During the question and answer session. You may registered to ask a question at any.
Operator: Welcome to Schrodinger's conference call to review our third quarter 2024 financial results.
Madison: My name is Madison and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one on your telephone keypad. You may withdraw yourself from the queue by pressing star and 2.
Madison: Time by pressing the star and one on your telephone keypad.
Madison: You may withdraw yourself from the queue by pressing star and to you. Please be advised that this call is being recorded at the company's request now I would like to introduce your host for today's conference Ms. Sharon Madden Senior Vice President of Investor Relations and corporate Affairs. Please go ahead.
Operator: Please be advised that this call is being recorded at the company's request.
Jaren Madden: Now, I would like to introduce your host for today's conference, Ms. Jaren Madden, Senior Vice President of Investor Relations and Corporate Affairs.
Jaren Madden: Please go ahead. Thank you and good morning, everyone. Welcome to today's call during which we will provide an update on the company and review our third quarter 2024 financial In addition to our press release announcing our third quarter results, we also issue the press release announcing our new research collaboration and expanded software licensing agreement with Navarro.
Sharon Madden: Thank you and good morning, everyone welcome to today's call during which we will provide an update on the company and review our third quarter 2024 financial results. In addition to our press release announcing our third quarter results. We also issued a press release announcing our new research collaboration and expanded software licensing agreement with Novartis.
Jaren Madden: Both press releases are available on our website at schrodinger.com. Here with me on our call today are Ramy Farid, Chief Executive Officer, Karen Akinsanya, President of R&D Therapeutics, and Geoff Porges, Chief Financial Officer.
Sharon Madden: Both press releases are available on our website at <unk> Dot com here with me on our call today are Rami Fareed, Chief Executive Officer, Karen Aachen, Sanya President of R&D Therapeutics, and Geoff Porges, Chief Financial Officer. Following our prepared remarks, we'll open the call for Q&A.
Jaren Madden: Following our prepared remarks, we'll open the call for Q&A. During today's call, management will make statements that are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements related to our outlook for the full year 2024, our plans to accelerate growth of our software business and advance our collaborative and proprietary drug discovery programs, the timing of, initiation of, and readouts from our clinical trials, the clinical potential and properties of our compounds, the anticipated benefits of our collaboration with Novartis, the use of our cash resources, and our future expectations.
Sharon Madden: During today's call management will make statements that are forward looking and made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995, including without limitation statements related to our outlook for the full year 2020 for our plans to accelerate growth of our software business and advance our collaborative and proprietary drug.
Sharon Madden: Discovery programs, the timing of initiation of and Readouts from our clinical trials the clinical potential in properties of our compounds the anticipated benefits of our collaboration with Novartis the use of our cash resources and our future expenses.
Jaren Madden: These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies, and prospects, which are based on the information currently available to us and on assumptions we have made. Actual results may differ materially due to a number of important factors, including the considerations described in the Risk Factors section and elsewhere in the filings we make with the SEC, including our Form 10-Q for the quarter ended September 30, 2021.
Sharon Madden: These forward looking statements reflect our current views about our plans intentions expectations strategies and prospects, which are based on the information currently available to us and on assumptions. We have made actual results may differ materially due to a number of important factors, including the considerations described in the risk factors section and elsewhere in the filings we make with the SEC.
T SEC, including our Form 10-Q for the quarter ended September 32020 for these forward looking statements represent our views only as of today and we caution you that except as required by law, we may not update them in the future whether as a result of new information future events or otherwise.
Jaren Madden: These forward-looking statements represent our views only as of today, and we caution you that, except as required by law, we may not update them in the future, whether as a result of new information, future events, or other events.
Jaren Madden: Also included in today's call are certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and should be considered only in addition to, and not a substitute for, or superior to, GAAP financial measures. Please refer to the tables at the end of our press release, which is available on our website for reconciliations of these non-GAP measures to the most directly comparable GAP measures.
Sharon Madden: Also included in today's call are certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and should be considered only in addition to and not a substitute for or superior to GAAP measures. Please refer to the tables at the end of our press release, which is available on our website for.
Sharon Madden: Patients of these non-GAAP measures to the most directly comparable GAAP measures and with that I'd like to turn the call over to Rami. Thanks, Darin and thank you everyone for joining us today.
Jaren Madden: And with that, I'd like to turn the call over.
Ramy Farid: Thanks, Jaren, and thank you, everyone, for joining us. At Schrodinger, we are transforming the way therapeutics and materials are discovered. Our industry-leading computational platform combines proven physics-based methods with the speed of machine learning to accelerate molecular discovery. Our platform is used by thousands of companies and research institutes worldwide, including every major pharmaceutical company. and the success of collaborators and co-founded companies reflect the power of our approach.
Rami Fareed: Schrodinger, we're transforming the way therapeutics and materials are discovered our industry, leading computational platform combines proven physics based methods with the speed of machine learning to accelerate molecular discovery. Our platform is used by thousands of companies and research institutes worldwide, including every major pharmaceutical company.
Rami Fareed: And the success of collaborators and co founded companies reflects the power of our approach.
Ramy Farid: Today we are very pleased to review the progress we have made across the business this quarter, beginning with this morning's exciting news of our collaboration with Novartis. Under the multi-target collaboration, Schrodinger and Novartis will combine pre-existing research efforts to advance therapeutics for a number of undisclosed targets outside of oncology. Schrodinger will receive $150 million up front and be eligible to receive up to $2.3 billion in milestone payments, as well as mid-single-digit to low-double-digit royalties on sales. This collaboration is a testament to the track record of our world-class discovery and translational science teams who are leveraging our leading computational platform at scale.
Rami Fareed: Today, we are very pleased to review the progress we have made across the business. This quarter beginning with this morning's exciting news of our collaboration with Novartis.
Rami Fareed: Under the multi target collaboration Schrodinger and Novartis will combine preexisting research efforts to advance therapeutics for a number of undisclosed targets outside of oncology.
Rami Fareed: <unk> will receive $150 million upfront and be eligible to receive up to $2 3 billion in milestone payments as well as mid single digit to low double digit royalties on sales. This collaboration is a testament to the track record of our World Class Discovery and translational science teams, who are leveraging our leading computational platform.
Rami Fareed: Norm at scale Novartis also signed an expanded multi year software agreement that substantially increases their access to our computational technology and enterprise informatics platform. The collaboration and software license agreement with Novartis combined further development of programs from our portfolio commitment to develop candidates.
Ramy Farid: Novartis also signed an expanded multi-year software agreement that substantially increases their access to our computational technology and enterprise informatics platform. The Collaboration and Software License Agreement with Novartis combines further development of programs from our portfolio, commitment to develop candidates against targets of mutual interest, and increased-scale deployment of our software by Novartis. We are seeing increased demand for these combination drug discovery software arrangements that leverage synergies between different components of our business.
Rami Fareed: Against targets of mutual interest and increased scale deployment of our software by Novartis. We are seeing increased demand for these combination drug discovery software arrangements that leverage synergies between different components of our business.
Ramy Farid: Turning to our financial results, total revenue for the third quarter was $35.3 million and software revenue was $31.9 million. While software revenue is slightly below our expectations, we are excited about the opportunities we have to finish the year strongly. Customer engagement is high. We are confident about the expected scale of customer renewals and scale-ups through the end of the year, and we have raised the lower end of our software revenue growth guidance for the year.
Rami Fareed: Turning to our financial results total revenue for the third quarter was $35 $3 million and software revenue was $31 9 million while software revenue was slightly below our expectations. We are excited about the opportunities we have to finish the year strongly customer engagement is high we are confident about the expected.
Rami Fareed: Scale of customer renewals and scale up through the end of the year and we have raised the lower end of our software revenue growth guidance for the year, Jeff will discuss our third quarter financial results and updated guidance in more detail shortly.
Ramy Farid: Geoff will discuss our third quarter financial results and updated guidance in more detail shortly. We continue to see progress and value from companies we have co-founded. Ajax Therapeutics recently dosed the first patient in their first Phase 1 study. Nimbus announced updated Phase 1-2 clinical data for their HBK1 inhibitor. And we added $48 million to our cash balance as a result of Lilly's acquisition of more Our proprietary pipeline is also advancing, and we look forward to reporting initial data from all three of our clinical stage programs next year. Through the remainder of the year, we see clear opportunities to drive software growth, extend our scientific leadership, and advance our collaborative and proprietary pipeline.
Rami Fareed: We continue to see progress and value from companies, we have Cofounded Ajax therapeutics recently dosed the first patient in their first phase one study Nimbus announced updated phase one two clinical data for their HBK, one inhibitor and we added $48 million to our cash balance as a result of <unk> acquisition of Morphic.
Rami Fareed: Our proprietary pipeline is also advancing and we look forward to reporting initial data from all three of our clinical stage programs next year.
Speaker Change: Through the remainder of the year, we see clear opportunities to drive software growth extend our scientific leadership and advance our collaborative and proprietary pipeline I will now turn the call over to Karen who will discuss the novartis collaboration in more detail and provide an update on our proprietary pipeline. Thanks.
Karen Akinsanya: I will now turn the call over to Karen, who will discuss the Novartis collaboration in more detail and provide an update on our proprietary pipeline.
Karen Akinsanya: Thank you, Ramy, and good morning, everyone. The collaboration we announced today with Novartis builds on more than a decade of productive collaborations with pharmaceutical partners and companies we've co-founded. This significant new agreement underscores our track record of generating high-quality candidates for clinical development and the growing interest across the industry in scaling up the use of our physics-based computational platform to solve drug design challenges. Over the last few years, we have leveraged our expertise in experimental structural biology and protein structure refinement, together with our computational platform, to pursue novel insights and chemical matter for compelling first-in-class targets outside of oncology.
Karen Aachen: Thank you Rami and good morning, everyone. The collaboration we announced today with Novartis builds on molten a decade of productive collaborations with pharmaceutical partners and companies we've co founded.
Karen Aachen: This significant new agreement underscores our track record of generating high quality candidates for clinical development and that growing interest across the industry and scaling up the use of a physics based computational platform to solve drug design challenges.
Karen Aachen: Over the last few years, we have leveraged our expertise in experimental structural biology and protein structure refinement together with our computational platform to pursue novel insights and chemical matter for compelling first in class targets outside of oncology.
Karen Akinsanya: A selection of these undisclosed programs were licensed to Novartis as part of this transaction. Schrodinger and Novartis will now combine our existing research efforts to advance therapeutics for these programs and collaborate on additional targets of mutual interest in Novartis' core therapeutic areas. The decision to partner these programs with Novartis reflects our view that their deep therapeutic area and clinical expertise will amplify and accelerate the opportunity to move these programs through development after candidate selection and potentially to commercialization. This partnership is emblematic of our business development and translational science strategy to leverage the extensive capabilities and experience of specific partners to advance and maximize the potential of certain proprietary programs. The Novartis collaboration is also an example of an important initiative that we have implemented in recent years.
Karen Aachen: A selection of these undisclosed programs were licensed to Novartis as part of this transaction.
Karen Aachen: Schrodinger and Novartis will now combine our existing research efforts to advance therapeutics for these programs and collaborate on additional targets of mutual interest in Novartis is core therapeutic areas.
Karen Aachen: The decision to partner these programs with Novartis reflects our view that the deep therapeutic area and clinical expertise.
Karen Aachen: Amplify and accelerate the opportunity to move these programs through development after candidate selection and potentially to commercialization.
Karen Aachen: This partnership is emblematic of our business development and translational science strategy to leverage the extensive capabilities and experience of specific partners to advance and maximize the potential of such and proprietary programs.
Karen Aachen: The Novartis collaboration is also an example of an important initiatives that we have implemented in recent years.
Karen Akinsanya: The juxtaposition of a drug discovery collaboration and significantly expanded software access enables peer-to-peer platform learning while pursuing joint therapeutic programs. This enhances knowledge transfer and first-hand understanding of the impact of the platform during the scale-up journey, facilitating wider adoption in the future.
Karen Aachen: The juxtaposition of a drug discovery collaboration and significantly expanded software access enables peer to peer platform learning while pursuing joint therapeutic programs.
Karen Aachen: This enhances knowledge transfer and firsthand understanding of the impact of the platform during the scale up journey facilitating wider adoption in the future.
Karen Akinsanya: Turning briefly to our proprietary pipeline, we are continuing to make progress in our three clinical stage programs. SGR 1505, our MORT1 inhibitor, is advancing in a Phase 1 study in patients with relapsed refractory B. solanformas. SGR 2921, our CDC7 inhibitor, is also advancing through a Phase 1 study in patients with relapsed refractory acute myeloid leukemia or high-risk myelodysplastic syndrome. Earlier this year, we initiated the Phase 1 study of our WE1MIT1 co-inhibitor SgR3515 in patients with advanced solid tumours. We are encouraged by the progress of the studies and are on track to report initial clinical data from all three programmes in 2025.
Karen Aachen: Turning briefly to our proprietary pipeline, we are continuing to make progress in our three clinical stage programs.
Karen Aachen: S. J F 15 O five hour more one inhibitor is advancing in a phase one study in patients with relapsed refractory B cell lymphomas S. J O 29, 21 hour C. D. C. Seven inhibitor is also advancing through a phase one study in patients with relapsed refractory acute myeloid leukemia or high risk myelodysplastic.
Karen Aachen: <unk> syndrome.
Karen Aachen: Earlier this year, we initiated the phase one study of our we won one co inhibitor S. G. R 35, 15 in patients with advanced solid tumors.
We are encouraged by the progress of the studies and are on track to report initial clinical data from all three programs in 2025.
Karen Akinsanya: We recently presented data supporting the differentiated profiles of our molecules. Last month, at the 2024 ENA triple meeting, we presented preclinical data for SGR3515, demonstrating a favorable pharmacological profile and dosing schedule, enabled by co-inhibition and synthetic lethality of WE1 and MIT1. Also at TNA, we presented an update on our PRMT5 MTA program, which highlighted a series of highly selective molecules with potential for best-in-class pharmacological properties. Behind these programs, we are pursuing additional first-in-class and best-in-class opportunities that have the potential to generate value through new ventures, partnerships, or by advancing them independently.
Karen Aachen: We recently presented data supporting the differentiated profiles of our molecules last month at the 'twenty 'twenty four E N. A triple meeting we presented preclinical data with S. J F 35, 15, demonstrating a favorable pharmacological profile and dosing schedule enabled by co inhibition answer.
Karen Aachen: Synthetic lethality of we want and meant one.
Karen Aachen: Also the TNA, we presented an update on our peer M. T. Five MTA program, which highlighted a series of highly selective molecules with potential for best in class pharmacological properties.
Speaker Change: Behind these programs we are pursuing additional first in class and best in class opportunities that have the potential to generate value through new ventures partnerships all by advancing them independently. We look forward to reporting continued progress across our pipeline over the coming months I'll now turn the call over.
Karen Akinsanya: We look forward to reporting continued progress across our pipeline over the coming months.
Geoff Porges: I'll now turn the call over to Geoff.
Speaker Change: Jeff.
Geoff Porges: Thank you, Karen.
Geoff Porges: And good morning, everyone. Q3 was a very productive quarter for Schrodinger. During the quarter, our software revenue grew by 10%. And for the first nine months of the year, our software growth of 11% is in line with our expectations and the usual timing of large renewal opportunities. We initiated the Predictive Talks Project, funded in part by the grant from the Gates Foundation. And today we announced a significant new multi-target drug discovery collaboration with Novartis, diversifying our collaborations into new therapeutic areas. Our clinical programs continue to advance and during the Q3 we realized $48 million from the successful sale of Morphic to Lilly.
Jeff: With your tower and good morning, everyone Q3 was a very productive quarter for schrodinger during the quarter. Our software revenue grew by 10% and for the first nine months of the year. Our software growth of 11% is in line with our expectations of unusual timing of large renewal opportunities. We initiated the predictive talks project funded in part by the grab from workday.
Jeff: Its foundation and today we.
Jeff: Also significant near multi target for a discovery collaboration with Novartis.
Jeff: Our Sofia collaborations into new therapeutic areas.
Jeff: Medical programs continue to advance and during Q3, we realized 48 million from a successful sale of more free to Lilly.
Geoff Porges: We boasted our cash reserves as a result of this sale and expect our capital position to increase as a result of the collaboration we announced today. Software revenue in Q3 was just below the lower end of our expectations, driven by a slower-than-expected ramp in our activities for the Predictive Talks initiative in August and the associated slower recognition of the revenue from the grant from the Gates Foundation, as well as small software opportunities that were deferred or reduced compared to our expectations. We expect the shortfall in the revenue for the Gates-funded grant to be made up over the remaining quarters of the grant.
Jeff: We bolstered our cash reserves as a result of this sale, we expect our capital position through increased as a result of the collaboration we announced today.
Speaker Change: Software revenue in Q3 was just below the lower end of our expectations driven by a slower than expected ramp in our activities for the predicted talks initiative in August.
Speaker Change: It'd be associated slower recognition of revenue from our grab from a gates Foundation.
Well, a small software opportunities that were deferred or juice compared to our expectations, we expect a shortfall.
Speaker Change: Shortfall in the revenue for the gates funded grants to be made up over the remaining quarters of the grant.
Geoff Porges: Based on these expectations and our outlook for the quarter, we have narrowed and increased the lower end of the range of our software revenue growth guidance for the year. Drug Discovery Revenue was significantly lower in Q3 than Q2 and compared to Q3 in the prior year. This reduction was based on revenue recognized from milestones and upfronts in the prior periods that did not recur in Q3. Based on the timely milestones for the remainder of the year, we now expect drug discovery revenue for the year to be in the range of 20 to 30 million compared to the prior guidance of 30 to 35 million.
Speaker Change: Based on these expectations and our outlook for the quarter, we are in Howard and increase the lower end of the range of our software revenue growth guidance for the year.
Speaker Change: So our discovery revenue was significantly lower in Q3 than Q2 and compared to Q3 in the prior year.
Speaker Change: This reduction was based on revenue recognized from milestones and upfront prior periods that did not recur in Q3.
Speaker Change: Based on the timing of milestones for the remainder of the year. We now expect our discovery revenue for the year to be in the range of $20 million to $30 million compared to the prior guidance of $30 million to $35 million based on the recently announced Novartis collaboration we expect our drug discovery revenue to increase in 2025.
Geoff Porges: Based on the recently announced Novartis collaboration, we expect our drug discovery revenue to increase in 2025. In Q3, our software revenue was $31.9 million, an increase by 10% compared to the same period a year ago. The increase was driven by increases in hosted revenue, as existing large and mid-sized customers transitioned to hosted software licenses, and existing hosted customers increased the size of their contracts during renewal. Hosted revenue increased to 28% of total software revenue compared to 23% in the same period in 2023. The increase in hosted revenue was partially offset by decreases in on-prem contracts as mid-to-large multi-year on-prem customers from Q3 2023 did not have scheduled renewals in Q3 this year.
Speaker Change: In Q3, our software revenue was 31.9 million increased by 10% compared to the same period a year ago.
Speaker Change: The increase was driven by increases in hosted revenue as existing large and midsized customers transition to hosted software licenses and existing homes with customers increase the size of the contract during renewals.
Speaker Change: Hosted revenue increased to 28% of total software revenue compared to 23% in the same period in 2023.
Speaker Change: The increase in hosted revenue was partially offset by decreases in on Prem contracts as mid to large multiyear on Prem customers from Q3 2023 did not have scheduled renewals in Q3 this year.
Geoff Porges: Services and Maintenance Revenue were relatively flat year over year, and this also reflects more maintenance services being incorporated into hosted software contracts. Contribution revenue increased to $3.1 million, driven by the initial revenue recognized from the Gates Foundation for the Predictive Toxicology Initiative added to the pre-existing battery research grant. Drug discovery revenue was $3.4 million in Q3 compared to $13.7 million in Q3 last year. The lower drug discovery revenue was due to the reduced number of collaboration projects in Q3 this year compared to the prior year, and the absence of Zipmian milestones during the quarter. Total revenue was $35.3 in Q3 and decreased by 17% compared to the prior year.
Services and maintenance revenue were relatively flat year over year and this also reflects more maintenance services being incorporated hosted software contracts.
Speaker Change: Contribution revenue increased to three per $1 million driven by the initial revenue recognized when the gates Foundation for predictive toxicology initiative added to the pre existing battery research grant.
Speaker Change: Drug discovery revenue was $3 4 million in Q3 compared to 13.7 Q3 last year, the lower drug discovery revenue was due to the reduced number of collaboration projects in Q3, this year compared to the prior year and the absence of a shifting of milestones during the quarter.
Speaker Change: Total revenue was 30 543 in Q3 decreased by 17% compared to the prior year. The decrease was due to lower drug discovery revenue in the quarter.
Geoff Porges: The decrease was due to lower drug discovery revenue in the quarter. total revenue also declined compared to Q2 based on lower drug discovery revenue. A software gross margin was 73.4% in Q3 compared to 75.7% in the same period a year ago and compared to 80% in Q2 this year. The gross margin in Q3 has been affected by the initial revenue recognized in the Gates Predictor-Tox collaboration and is likely to continue at a lower level than 2023 for the duration of the grant. Our cost of services for drug discovery was $9.1 million in Q3 compared to $12 million in Q3 last year and $8.8 million in Q2 this year.
Speaker Change: Total revenue also declined compared to Q2 based on lower drug discovery revenue.
Speaker Change: Software gross margin was 73.4% in Q3 compared to 75, 7% the same period, a year ago and compared to 80% in Q2 this year.
Speaker Change: The gross margin in Q3 is being affected by the initial revenue recognized in the gates predictor talks collaboration and is likely to continue at a lower level than 2023 for the duration for grant.
Cost of services for drug Discovery was nine 1 million in Q3 compared to 12 million in Q3 last year and April 8 million in Q2. This year. The decrease in cost of drug discovery compared to Q3 last year due to the smaller number of collaboration programs in our portfolio this year compared to last year.
Geoff Porges: The decrease in cost of drug discovery compared to Q3 last year is due to the smaller number of collaboration programs in our portfolio this year compared to last year. As we have noted in prior periods, some of the FTEs and other expenses previously reported in drug discovery cost of services are now being reported in R&D and are supporting our proprietary internal programs. Looking ahead, this reallocation may be subject to the balance between collaboration and proprietary projects and should move in the other direction as we ramp up our activity for the Nevada's collaboration. Our overall gross margin was 50% in Q3 2024 compared to 56% in the same period a year ago.
Speaker Change: As we have noted in prior periods some of the Ftes in other expenses previously reported in drug discovery cost of services are now being reported in R&D are supporting our proprietary internal programs. Looking ahead. This reallocation that'd be subject to the balance between collaboration proprietary projects and should move in the other direction as we wrap up our.
<unk> for the Novartis collaboration our overall gross margin was 50% in Q3 2024 compared to 56% in the same period a year ago. The difference was due to lower drug discovery revenue this year and a lower software gross margin.
Geoff Porges: The biggest difference was due to the lower drug discovery revenue this year and the lower software gross margin. In Q3 this year, R&D expense was $51 million, compared to $47 million in Q3 last year, and compared to $51 million in Q2. The year-over-year increase in R&D was mostly driven by increased FTE associated expenses in both our platform and therapeutic R&D activities. As in prior periods, our drug discovery R&D was a little over half of our total reported R&D expense in the quarter. Sales and marketing expenses were $10.3 million in Q3 2024 and increased by 13.6% compared to Q3 last year and by 7% compared to Q2 this year.
In Q3 this year R&D expense was 51 million compared to $47 million in Q3 last year and compared to 51 million in Q2, a year over year increase in R&D was mostly driven by increased FTE associated expenses in both our platform and therapeutic guarantee activities.
Speaker Change: As in prior periods, our drug discovery R&D was a little over half of our total reported R&D expense in the quarter.
Speaker Change: Sales and marketing expenses were $10 3 million in Q3, 'twenty 'twenty four and increased by 13, 6% compared to Q3 last year by 7% compared to Q2 this year.
Geoff Porges: The increase in sales and marketing expenses is primarily due to higher FTE expenses supporting our software commercialization. G&A expense was $24.8 million in Q3 this year and increased by 4% compared to Q3 in 2023 and by 6% compared to Q2 2024. G&A expense increased based on FTE-driven costs and royalty obligations associated with the sale of Morphic stocks. These were offset by reduced professional services expenses and taxes. Total operating expenses were $86 million compared to $80 million in Q3 last year and compared to $84 million in Q2. The increase compared to last year was mainly due to higher R&D.
The increase in sales and marketing expense was primarily due to higher FTE expenses supporting our software commercialization.
Speaker Change: G&A expense was 24.8 million in Q3, this year and increased by 4% compared to Q3 in 2023 and by 6% compared to Q2 2024.
Speaker Change: G&A expense increased based on FTE, driven costs and royalty obligations associated with the sale of more feedstock.
Speaker Change: These were offset by reduced professional services expenses and taxes.
Speaker Change: Total operating expenses were 86 million compared to $80 million in Q3 last year and compared to 84 million in Q2, the increase compared to last year was mainly due to higher R&D.
Geoff Porges: For Q3, our operating loss was $68.4 million, compared to a loss of $56 million in Q3 2023 and a loss of $53 million in Q2 this year. The change in fair value of equity method investments in Q3 was $25.5 million, driven by the increase in the value of our investments in structure and morphic during the quarter. In the same period last year, we reported a reduction in the value of these investments of $14.5 million, and Q2 we reported a reduction of $5.8 million in the value. Other income was $4.7 million in Q3 compared to $5.8 million in Q3 last year, and compared to $4.6 million in Q2 this year.
Speaker Change: For Q3 operating loss of $68 4 million compared to a loss of $56 million in Q3 2023 at a loss of 53 mile in Q2 this year the.
Speaker Change: The change in fair value of equity method investments in Q3 was $25 5 million driven by the increase in the value of our investments in structure in morphic during the quarter.
Speaker Change: In the same period last year, we reported a reduction in the value of these investments were $14 5 million in Q2, we reported reduction of five 8 million in the value.
Speaker Change: Other income was $4 7 million in Q3 compared to $5 8 million Q3 last year and compared to $4 6 million in Q2. This year the decrease compared to the prior year was based on a lower cash balance this year.
Geoff Porges: The decrease compared to the prior year was based on a lower cash balance this year. Total other income was $30.2 million in Q3 compared to a loss of $8.7 million in Q3 last year and a loss of $1.2 million in Q2 this year. Our tax benefit was $0.1 million, and our net income was a loss of $38 million, or $0.52 cents per share. In Q3 a year ago, we reported a net loss of $62 million, or $0.86 cents per share. The lower net loss was due to higher gain on equity method investments, offsetting higher loss from operations in Q3.
Speaker Change: Total other income was $30 2 million in Q3 compared to a loss of $8 7 million in Q3 last year or a loss of $1 2 million in Q2 this year.
Speaker Change: Our tax benefit was north of one 1 million and our net income was a loss of $38 million or 52 cents per share in Q3, a year ago. We reported a net loss of 62 million or 86 cents per share the lower net loss was due to higher gain on equity method investments offsetting higher loss from operations in Q3.
Geoff Porges: The Luton basic share count was $72.8 million compared to $71.9 million in the same period of 2023 and compared to $72.7 million in Q2 this year. For the nine months of this year, our software revenue was $101 million increased by 11% compared to the same period of 2023. Our drug discovery revenue declined from $52 million to $18.5 million based on the non-recurring milestones recognized and larger collaboration portfolio last year. Our total revenue year-to-date is $119 million compared to $142.5 million in the same period last year. Our software gross margin is 76.5% for the first nine months of the year compared to 77% for the comparable period last year.
Speaker Change: Our diluted and basic share count was $72 8 million compared to 71.9 million. The same period of 2023 and compared to 72.7 more in Q2 this year.
Speaker Change: For the nine months of this year, our software revenue was 101 million increased by 11% compared to the same period of 2023.
Speaker Change: Drug discovery revenue declined from $52 million at the $18 5 million based on the nonrecurring milestones recognized and larger collaboration portfolio last year.
Speaker Change: Total revenue year to date of 119 million compared to $142 5 million in the same period last year, our software gross margin of 76, 5%.
Speaker Change: For the first nine months of the year compared to 77% from a comparable period last year.
Geoff Porges: Favorable trends and expenses were offset by the effect of recognizing the revenue and costs of the Gates collaboration in the most recent quarter. Operating expenses increased from $231 million in the first nine months of 2023 to $257 million in the first nine months of this year. The increase was mainly due to higher R&D expenses. Our loss from operations for the first nine months was $189 million, compared to $148 million in the same period a year ago. Our income was $42 million for the first nine months, compared to $222 million for the same period in 2023, when we recognized the distribution from the sale of Nimbus's Tic-2 to Takeda.
Speaker Change: We're transferring expenses were offset by the effect of recognizing the revenue and costs probably gates collaboration in the most recent quarter.
Speaker Change: Operating expenses increased from 231 million in the first nine months of 2023 to 257 million in the first nine months of this year. The increase was mainly due to higher R&D expenses.
Speaker Change: Loss from operations for the first nine months was $139 million compared to 148 million in the same period a year ago. Other income was 42 million for the first nine months compared to 222 million for the same period in 2023, when we recognized the distribution from the sale of nimble cystic tutto Takeda.
Geoff Porges: Net income year-to-date is a loss of $147 million, or $2.02 per share. This compares to a net income of $71 million and EPS of $1 for the same period of 2023. Our cash used in operations this quarter was $33 million, compared to $50 million in Q3 last year. Our cash and marketable securities balance increased to $398 million at the end of Q3, compared to $382 million at the end of Q2. This increase was based on the realization of $49 million from the sale of shares in co-founded company equity positions during the quarter, which offset our operating cash burden.
Speaker Change: Net income year to date is a loss of $147 million or $2.02 per share.
Speaker Change: This compares to net income of 71 million and EPS of $1 for the same period of 2023.
Speaker Change: Our cash used in operations this quarter was $33 million compared to $50 million in Q3 last year.
Speaker Change: Cash and marketable securities balance increased to $398 million at the end of Q3 compared to 382 million at the end of Q2.
Speaker Change: This increase was based on a realization of $49 million from the sale of shares in co founded company equity positions during the quarter, which offset our operating cash burn.
Geoff Porges: Before I share our updated financial guidance for the year, I would like to make some general comments about the financial implications of the collaboration we announced today. First, while the upfront payment is cash that we should receive around year-end, the revenue associated with that cash will be recognized over several years as we execute the drug discovery project in the collaboration. We expect there to be some ramp-up over several quarters associated with these projects, so the drug discovery revenue contribution this year will be very modest. The collaboration is also associated with a significant multi-year software contract that substantially increases Novartis' access to our technology.
Speaker Change: Before I share our updated financial guidance for the year I would like to make some general comments about the financial implications of the collaboration we announced today.
Speaker Change: First while the upfront payment is cash that we should receive around year end the revenue associated with that cash will be recognized over several years as we execute the drug discovery projects in the collaboration we.
Speaker Change: We expect there'll be some ramp up over several quarters associated with these projects. So the drug discovery revenue contribution this year will be very modest.
Speaker Change: The collaboration is also associated with a significant multiyear software contract, but substantially increases novartis has access to our technology.
Geoff Porges: The software contract will contribute considerable revenue in Q4 as on-prem software revenue and will also contribute some revenue recognized ratably over the full three-year period of the contract. This Q4 software revenue contribution is consistent with the updated financial guidance for the year. Based on our news today and the outlook for the balance of our business, we are narrowing the range of our software revenue guidance from 6% to 13% to 8% to 13%. The remaining uncertainty is not about whether outstanding software renewals occur, but about the scale of the contracts and the final terms and timing and their effect on revenue.
The software contract will contribute considerable revenue in Q4 as on Prem software revenue and will also contribute some revenue recognized ratably over the full three year period of the contract.
Speaker Change: This Q4 software revenue contribution is consistent with the updated financial guidance for the year.
Speaker Change: Based on our news today and the outlook for the balance of our business. We are narrowing the range of our software revenue guidance from 6% to 13% to 8% to 13%. The remaining uncertainty is not about whether outstanding software renewals occur, but about the scale of the contracts and the final terms and timing and their effect on revenue.
Geoff Porges: we are lowering our drug discovery revenue guidance to 20 to 30 million from 30 to 35 million. The lower range reflects our reduced probability of reaching collaboration milestones during the remainder of Q4, and the possibility of recognizing these milestones and other revenue from collaborations in 2025. The other aspects of our financial guidance are unchanged. We still expect operating expense growth to be significantly lower in 2024 than 2025. Our operating cash use guidance is unchanged, but will be influenced by the timing of receipt of payment from Novartis around U.N. We're very excited about the outlook for the rest of the year and this new collaboration, which sees another global pharmaceutical company recognizing the value of our approach to drug discovery, particularly when deployed at scale.
Speaker Change: We are lowering our product discovery revenue gardens to $20 million to $30 million from $30 million to $35 million.
Speaker Change: The lower range reflects a reduced probability of reaching collaboration milestones during the remainder of Q4 and the possibility of recognizing these milestones and other revenue from collaborations in 2025.
Speaker Change: The other aspects of our financial guidance are unchanged, we still expect operating expense growth to be significantly lower in 2024 and 2025, our operating cash use guidance is unchanged, but will be influenced by the timing of receipt of payment from novartis around year end.
Speaker Change: We're very excited about the outlook for the rest of the year and this new collaboration which seasonality global pharmaceutical company recognizing the value of our approach to drug discovery, particularly when deployed at scale.
Geoff Porges: We see many additional opportunities for similar increases in scale at other large biotech and pharma companies, as well as additional collaboration. Our proprietary research efforts were a significant part of this collaboration, and we look forward to disclosing clinical data from our programs next year.
Speaker Change: We see many additional opportunities for similar increases in scale and other large biotech and pharma companies as well as additional collaborations.
Speaker Change: Our proprietary research efforts were a significant part of this collaboration and we look forward to disclosing clinical data from our programs next year I'll now turn the call back to Roni.
Ramy Farid: I'll now turn the call back to Ramy.
Ramy Farid: Thanks Geoff. We are very pleased with the progress we have made this year and the opportunities we have to deliver on our full year results. I'd like to acknowledge the extraordinary efforts of our employees. Our achievements are a direct result of their dedication, commitment, and hard work.
Speaker Change: Thanks, Jeff we are very pleased with the progress we have made this year and the opportunities we have to deliver on our full year results I'd like to acknowledge the extraordinary efforts of our employees. Our achievements are a direct result of their dedication commitment and hard work at this time, we'd be happy to take your questions.
Operator: At this time, we'd be happy to take your questions. Thank you. And at this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star and two.
Speaker Change: Thank you.
Speaker Change: And at this time, if you would like to ask a question. Please press the star and one on your telephone keypad, you may remove yourself from the queue at any time by pressing star and two.
Michael Yee: And we will take our first question from Michael Yee with Geoffrey's.
Speaker Change: And we will take our first question from Michael Yee with Jefferies. Please go ahead.
Unnamed Speaker: Hey, good morning, guys. This is Matt on for Mike. Thanks so much for taking the question. Can you expand just a bit on the key drivers here that give you confidence in the updated software guidance today? And especially, can you expand at all on the extent that the deal today helps you with that guidance? And any other trends that you would maybe highlight or point to that give you confidence this quarter and moving forward as well? Thanks.
Speaker Change: Hey, Good morning, guys. This is Matt on for Mike. Thanks, So much for taking the question.
Speaker Change: Can you expand just a bit on the key drivers here that give you confidence in the updated software guidance today.
Speaker Change: And especially can you expand at all on the extent that the deal today helps you that guidance.
Speaker Change: Any other trends that you would maybe highlight or point, you think give you confidence this quarter and moving forward as well thanks.
Unnamed Speaker: Sure. The fourth quarter has always been, or at least in recent years, a large proportion of annual revenue. If you look back the last few years, it's been in the range of 42 to 44% of total revenue and the software. And we expect that to be similar this year. So we are on track to close the renewals necessary to meet that narrow guidance range. Curling of ounces is a significant component of that.
Speaker Change: Sure Matt.
Speaker Change: The fourth quarter has always been at least in recent years.
Speaker Change: A large proportion of annual revenue.
Speaker Change: The last few years has been in the range of 42% to 44%.
Speaker Change: Total revenue.
Speaker Change: Software and we expect that to be similar this year. So we are on track to close the renewables necessary to meet the narrowed guidance range clearly novartis as being a significant component of that.
Unnamed Speaker: but it's not the only component of it and we're in discussions with multiple other companies about the nature of their renewals so as I said in my prepared remarks it's you know whether the renewals the number of years of the renewal but the exact mix between on-prem and hosted revenue all influences where we come in that range. But we are very confident about the range. We're very confident about the discussions we're having. Clearly, we're sort of almost halfway through the quarter now. So that's the basis for the increased confidence that we've conveyed with the narrow range.
Speaker Change: It's not the only component of it and we're in discussions with multiple other companies about the nature of their renewable solar as I said in my prepared remarks.
Speaker Change: Whether we reduced the number of years of the renewal of the exact mix between on Prem and hosted revenue all influences, where do we come in that range.
Speaker Change: We are very thoughtful about the range, we're very confident about the discussions we're having clearly we're almost halfway through the quarter now.
Speaker Change: So that's the basis really increased confidence that we have today within our branch.
Speaker Change: Thank you.
Mani Foroohar: And we will take our next question from Mani Foroohar with Lyric Partners.
Speaker Change: Thank you and we will take our next question from Manny through Haar with Leerink partners. Please go ahead.
Unnamed Speaker: Please go ahead. Hey guys, thanks for the question and congratulations on the deal.
Speaker Change: Hey, guys. Thanks for the question and congratulations on the deal.
Unnamed Speaker: As I'm looking at the updated guidance, Geoff, should we think about the narrow drug discovery guidance as reflecting a timing event, i.e., should we be looking to perhaps a more fulsome 1Q22 next year in drug discovery? And I have a quick follow-up. Thanks Mani. Yeah, I think in my prepared remarks I indicated that the basis for the reduction in the range was related to, certainly about timing of events around the end of the year. So I think our confidence about next year is considerable already. We're not giving formal guidance about next year but you can see some of the opportunities that we were anticipating towards the end of the year.
Speaker Change: As I'm looking at the updated guidance should.
Speaker Change: Should we think about the narrow drug discovery guidance.
Speaker Change: As reflecting a timing event I E should we be looking to perhaps a more fulsome <unk> next year in drug discovery.
Speaker Change: I have a quick follow up.
Speaker Change: Thanks Martin.
Speaker Change: Yes, I think in my prepared remarks, I indicated that the basis for the reduction in the range was revised uncertainty about timing of events around the end of the year. So.
Speaker Change: Okay.
Speaker Change: It's about next year is considerable already we're not giving formal guidance about next year.
Speaker Change: You can see some of the opportunities that we were anticipating towards the end of the year, where we're being cautious about in terms of timing and then slowly.
Unnamed Speaker: We're being cautious about in terms of timing and then clearly the largest deal is to see the announcement with respect to next year as well. So all of those things give us pretty high degree of confidence coming in.
Speaker Change: This deal is as we hit the announcement with respect to next year as well so all of those things give us.
Speaker Change: Pretty pretty high degree of confidence going into the year.
Unnamed Speaker: That's helpful. And from the commentary on the Novartis deal, that gives us some color in how you guys are thinking about the opportunity set around renewals with large existing partners.
Speaker Change: That's helpful.
Speaker Change: And.
Speaker Change: Some of the commentary on Novartis deal and that gave us some color on how you guys are thinking about the opportunities that are on renewals in large large existing partners.
Unnamed Speaker: If you guys could help comment a little bit on what you're seeing in terms of new partner, new client, new customer ads, and to what extent we should think about, you know, opening of the capital markets and exposure to biotech funding cycles in terms of new client formation as being a contributor over the next few months, and what you guys are seeing in that slice over the end market for you guys. Yeah, thanks. Thanks for having me. We are seeing positive new inquiry with respect to small companies interested in using our software. I think it's premature for us to be saying that they will be a significant contributor to our software growth.
Speaker Change: If you guys give how comment a little bit on what you're seeing in terms of new partner new client.
Speaker Change: Customer ads and to what extent.
Speaker Change: We should think about you know.
Speaker Change: The opening of the capital market.
Speaker Change: Exposure to biotech funding cycles in terms of new client formation as being a contributor over the next few months and what you guys are seeing and that's why it's only the end market for you guys.
Speaker Change: Yeah. Thanks, Thanks by the.
Speaker Change: We are seeing.
Speaker Change: Positive new inquiry.
Speaker Change: Respect to small companies interested in using our software.
Speaker Change: I think it's premature for us to be saying, but they will be a significant contributor to our software growth I mean to a certain extent. We were also the numbers are getting fairly large and so it would take quite a number of emerging biotech companies.
Unnamed Speaker: To a certain extent, the numbers are getting fairly large, and so it would take quite a number of emerging biotech companies initiating use of software to offset what we're seeing with large companies. So we remain very excited about the many large and, frankly, mid-sized companies who aren't using our technology at scale yet, and we're focusing our efforts on that group of customers. But equally, we're open for business with emerging companies, and I think much of the inquiry we're seeing there is actually from private companies, pre-IPO companies. I don't think we're seeing a significant tailwind in terms of companies that have accessed public markets yet.
Speaker Change: Initiating use our software to offset.
Speaker Change: What we're seeing with large companies so we.
Speaker Change: We remain very excited about the many large frankly midsized companies, who aren't using our technology at scale yet.
Speaker Change: And we're focusing our efforts on that group of customers.
Speaker Change: Equally well.
Speaker Change: The business with emerging economies.
Speaker Change: And I think much of the inquiry, we're seeing there is actually for private companies pre IPO companies.
Speaker Change: I think we're seeing a significant tailwind in terms of companies.
Speaker Change: Public public markets yet.
Unnamed Speaker: That may be something we see next year, and we're certainly prepared to respond to that in sales organizations in dialogue with those sort of companies and, frankly, their investors. But so far, it's not hitting us.
Speaker Change: Maybe something we see next year and we're certainly prepared.
Speaker Change: To respond to that.
Speaker Change: Our sales organization.
Speaker Change: Issues and in dialogue with other solar companies and frankly they are investors.
Speaker Change: So it's not hitting our numbers.
Unnamed Speaker: All right. Thanks.
Speaker Change: Alright, Thanks, that's really helpful.
Unnamed Speaker: That's really helpful. Thank you.
Scott Schoenhaus: And we will take our next question from Scott Schoenhaus with KeyBank.
Speaker Change: Thank you.
Speaker Change: And we will take our next question from Scott Schonhaus with Keybanc. Please go ahead.
Unnamed Speaker: Please go ahead. Hey guys, this is Steve on for Scott, just wondering what percent of your your software book of business is now cloud versus on? So, Steve, was your question, what percentage of that book of business is hosted by Sarncraft? Yeah, that's correct. Okay. So, of our total software, in Q3, 28% was hosted, up from 23% last year. If you focus on just the contracts with customers, then that percentage is going to be even higher. I don't have the number in front of me, but it's going to be probably in the high 30% range.
Speaker Change: Hey, guys its Steve on for Scott just wondering what percent of your book of business is now cloud versus on Prem.
Speaker Change: Jim.
Speaker Change: Okay.
Speaker Change: Oh, sorry.
Speaker Change: Steve was your question what percentage of that book of business has posted a strong brand.
Speaker Change: Sure.
Speaker Change: Yes, Thats correct, okay. So okay.
Speaker Change: Total software.
Speaker Change: In Q3, 28% was harvested.
Speaker Change: Up from 23%.
Speaker Change: Last year, if you focus on just the contracts with customers.
Ed: Ben It's Ed.
Ed: I was just going to be even higher.
Ed: I don't have the number in front of me, but I'm just trying to be probably in the high 30% range, yes that number it does go up and down from quarter to quarter. So as I indicated in my prepared remarks, because a significant part of the software.
Unnamed Speaker: Now, that number does go up and down from quarter to quarter.
Unnamed Speaker: So, as I indicated in my previous remarks, because a significant part of the software license to Novartis will be on-prem, the on-prem piece will bump up. But I would encourage you to look at some sort of smooth, long-term trend to see the trajectory of the transition to hosting, which we think is going to continue over the next few years.
Ed: Software license to Novartis will be off Prem the longtime peaceful bump up but I would encourage you to look at some sort of smooth as long term trend.
Ed: For January of the transition to hosted which we think is going to continue over the next few years.
Unnamed Speaker: Great. Thank you.
Great. Thank you.
Vikram Purohit: And we will take our next question from Vikram Purohit with Morgan Stanley. Please go ahead. Good morning, everyone.
Speaker Change: Thank you and we will take our next question from Vikram Taro head with Morgan Stanley. Please go ahead.
Unnamed Speaker: This is Gasper. I'm for Vikram.
Speaker Change: Good morning, everyone. This is Scott.
Unnamed Speaker: With the initial Mark 1 data expected shortly, could you recap for us your expectation of what you expect to report with this data release and how you are internally defining success and establishing the hardware for this readout? Thank you. We've spoken about releasing data in the first half of 2025. This will be the first disclosure about our ongoing phase one dose escalation study. The focus of that study is safety, PK, PV, and early evidence of efficacy. So in the disclosures next year, we expect to share an update on those data in terms of I'm going to be talking about the type of data we're looking for.
Speaker Change: Vikram with initial data expected shortly could you recap for us your expectation of what you expect to report which is at a release.
Speaker Change: And how you intend to define success on establishing the hardware for this readout. Thank you.
Speaker Change: Sure.
Speaker Change: We've spoken about.
In the first half of 2025 this will be the best disclosure.
Speaker Change: <unk> phase one dose escalation study.
Speaker Change: That study is safety.
Speaker Change: P K E and early evidence of efficacy.
Speaker Change: So in the next.
Speaker Change: Next year, we expect to share an update on those data.
Speaker Change: In terms of the types of data we're looking for obviously more on it's a very new mechanism, there's anyone else does that.
Unnamed Speaker: Obviously, Morton is a very new mechanism. There's only one set of clinical data out there. But we'll be looking to see positive data obviously on... The performance of our molecule from a draft properties point of view but also of course looking for evidence of activity. I want to remind you this is a dose escalation study, it is not powered to do a full efficacy analysis, but of course we'll be sharing whatever data we can when that release comes.
Speaker Change: But we won't be looking to see a positive.
Speaker Change: Positive data obviously.
Speaker Change: And the performance of our molecule for me.
Speaker Change: But to your point of views and also of course.
Speaker Change: Looking at the evidence of activity in the relapsed refractory b cell a minute malignancy patients now.
Speaker Change: The dose escalation study it is not.
Speaker Change: Paul just to do a full efficacy analysis, but of course, we'll be sharing and whatever data, we can but not really it comes out.
Unnamed Speaker: Thank you very much. Thank you.
Speaker Change: Thanks, Brian Thank you very much.
Evan Seigerman: And we will take our next question from Evan Seigerman with BMO Capital Markets. Please go ahead. Hi guys, thank you so much for taking my question.
Speaker Change: Thank you and we will take our next question from Evan Seeger women with BMO capital markets. Please go ahead.
Speaker Change: Hi, guys. Thank you so much for taking my question.
Unnamed Speaker: Um, Geoff, could you just talk a little bit more about how you're thinking about your P&L management, you know, and going forward, especially with all of these more advanced clinical programs? Um, and just maybe just remind us, you know, as we get to this readout, what's the bar for efficacy? Or how are you thinking about making these go no go decisions to advance your clinical programs beyond kind of phase one? Thank you guys.
Speaker Change: Jeff could you just talk a little bit more about how you're thinking about your P&L manage break you know going forward, especially with all of the more advanced clinical programs.
Speaker Change: And just maybe just remind us as.
Speaker Change: As we get to this readout.
Speaker Change: [laughter] bar for efficacy or how are you thinking about making a go no go decision.
Speaker Change: And your clinical programs beyond phase one.
Unnamed Speaker: Okay, now I'll jump in and talk about genome and then you can talk a little bit about the efficacy of that. So the. We're pretty focused on bringing our expense. growth rate. Wow. and and seeing some operating leverage emerging from the top line and I would say we we guided that our expense off-expert this year is going to be at low end of the prior range. So back into the single digits. And we are optimistic that we can continue to bring that down. Now, conversely, we are committed to continuing to invest in our platform and to invest in our proprietary molecules.
Speaker Change: Okay, So I'll jump in and talk about.
Speaker Change: Can you talk a little bit about.
Speaker Change: Excuse me Bob.
Speaker Change: So.
Speaker Change: <unk>.
Speaker Change: We are pretty focused on bringing our expense.
Speaker Change: Growth rate yeah.
Speaker Change: And seeing some operating leverage emerges from the top line.
Speaker Change: I would say.
We guided that our expense Opex growth. This year is going to be at low end of the prior range.
Speaker Change: So.
Speaker Change: Okay.
Speaker Change: Into the single digits.
Speaker Change: We are optimistic.
Speaker Change: <unk> continued to bring that down.
Speaker Change: Firstly, we are committed to continuing to invest in our platform and to invest in our proprietary molecules.
Unnamed Speaker: The collaborations sort of go through the income statement, as you know, in a different place. So what you're seeing in our R&D expense, which is the largest driver expenses platform and proprietary molecules. As we look ahead... for the certainly the immediate future. There isn't a lot of pressure to drive those expense items up. So, on the therapeutic R&D...
Speaker Change: Operations. So I'll go through the income statement as you know on a different different place.
So what youre seeing in our R&D expense, which is the largest driver of expenses platform and proprietary molecules.
Speaker Change: As we look ahead.
Speaker Change: For the certainly the immediate future.
Speaker Change: There was a large there isn't a lot of pressure to drive those expense.
Speaker Change: So on the therapeutic R&D.
Unnamed Speaker: I think we've been pretty clear that it would be very unlikely that we would advance on our own account all of the molecules in our portfolio. But that's not our intention or our expectation. It's not what we're planning for for now. So we're optimistic that there are some opportunities to take them forward, that they will emerge from the data next year, but not that we will be committed to all of that. So I think that we're on a pretty good path to managing the op-eds growth next year consistently with the trend that we've seen this year and start to really see that operating leverage kick in.
Speaker Change: You correctly point out that we're facing questions about twentyfold perfect clinical development.
Speaker Change: But I think we've been pretty clear that.
Speaker Change: It would be.
Speaker Change: Very unlikely that we would have that on our account all of the molecules in our portfolio.
Speaker Change: That's not our intention and our expectation is not what we're planning for for naturally so.
Speaker Change: We're optimistic that there are some opportunities to take them forward.
Speaker Change: I would imagine the data next year.
Speaker Change: So all of that so.
Speaker Change: Well have a pretty good path to managing.
Speaker Change: The Opex grows next year, it's just something with the trend that we've seen this year and start to really see that operating leverage kick in so I apologize for that.
Unnamed Speaker: So I apologize for the vague answer. We're in the process of finalizing our outlook and we'll give more detailed guidance to next year, but that hopefully gives you a sense of the color. I think that's very helpful, because it's just, yep.
Speaker Change: We're in the process of finalizing our outlook that we'll give more detailed guidance for next year, but hopefully it gives you a sense of the color.
Speaker Change: That's very helpful.
Speaker Change: Yes, yes.
Unnamed Speaker: Yeah, and then I'm just, sorry, Kenya, on the kind of going to go, I know I asked you this a lot, but now we're getting close, so I'm curious if your views have changed, or just how they've evolved, thank you.
Speaker Change: And then I'm just sorry on the kind of go no go I now ask you to fill up but now we're getting close I'm curious if your views have changed or just how they've evolved. Thank you.
Unnamed Speaker: and Barbara Epicosy from ALT-1. designed to really work in combination with standard of care. Thank you everyone for accepting, it is really important that these mechanisms are included through the book, and particular items even if those are not going to be included through the book. contributing, essentially, to duration of response once we get to combination. Thank you.
Speaker Change: The bar for efficacy promote one okay. So.
Speaker Change: First of all.
Mackie Lee: This is Mackie Lee.
Speaker Change: Lee.
Speaker Change: It has to be evidence of monotherapy activity.
Speaker Change: This mechanism.
Speaker Change: Just really block in combination with standard of care.
Speaker Change: I'm too old too.
Speaker Change: You'll see.
Speaker Change: <unk>.
Speaker Change: Those molecules mechanism.
As people become relapsed or refractory <unk>.
Speaker Change: It is important.
Speaker Change: One <unk>.
Speaker Change: D C seven and read one.
Speaker Change: Monotherapy actually James said that the bar is looking for.
Speaker Change: Is that the mechanism is all having activity alone.
Speaker Change: Ah patient response.
Speaker Change: Contributing essentially agency rational response once they get to combination studies.
Yeah.
Joe Catanzaro: And we will take our next question from Joe Catanzaro with Piper Sandler.
Speaker Change: Thank you and we will take our next question from Joe Catanzaro with Piper Sandler. Please go ahead.
Unnamed Speaker: Please go ahead. Great, thanks for taking my questions. I actually had a quick one on the PRMT-5 space, given your recent poster. There's been a couple of recent clinical updates for competitive PRMT-5 programs. So just wondering if you believe those data provide real clinical validation for that target, and when you look at those data, where do you see opportunities for your program to differentiate? Appreciate you're sort of still early in development there. Thanks.
Speaker Change: Great. Thanks for taking my questions I actually had a quick one on the PMT five space given your recent poster there's been a couple of recent clinical updates or competitive PMT five programs. So just wondering if you believe those data provide real clinical validation for that target and when you look at those data, but where do you see opportunities for Europe.
Speaker Change: Program to differentiate.
Speaker Change: I appreciate you're sort of still early in development there. Thanks.
Unnamed Speaker: Yeah, I mean, I think you're pointing to the fact that PRMT5 is an exciting mechanism that sort of burst onto the scene a couple of years ago, benefiting, obviously, from the synthetic lethal relationship between PRMT5 and MTA. Very interesting clinical data released last year at the Strickhall meeting showing a monotherapy activity in a very broad number of tumor types, actually, and that includes really tough tumors like glial blastoma. The update this year, I think, has demonstrated that there is evidence of that. again, across a number of tumors. But the question I think that we're all wondering about is whether the molecules that are out there today in the clinic are best in class.
Speaker Change: Yeah, I mean I think.
The fact that <unk> five is an exciting mechanism. So <unk> seen a couple of years ago.
Speaker Change: Benefiting obviously from other synthetic lethal relationship between P. R. M coupons MTA very interesting clinical data released last year and distributable methane showing a monotherapy activity.
Speaker Change: A very broad number of genotype.
Speaker Change: Oh really.
Speaker Change: Really tough gene is like Glioblastoma.
Speaker Change: Alright. Thank has demonstrated that there is evidence of activity again across a number of achievements, but the question I think we're all wondering about she's one of the molecules that are out there today in.
Speaker Change: Our best in class and we have to use.
Unnamed Speaker: And we have pursued. molecules that we believe offer the greatest opportunity to go after the broader set of tumors. That includes brain penetrance. We think that's really important, given the strength of the signal that has been seen previously in glial blastoma, but also other activity around DDI, where we think that PRMT5 NTA is going to be combined with other drugs, actually, to maximize the potential of the mechanism and the efficacy that's seen in combinations. And so these are some of the factors that we've been really focused on in our drug discovery efforts. And we also, I think, in this abstract reported, we think we have an angle on maximizing that synergy between PRMT5 and NTA, which we think could lead to deeper responses.
Speaker Change: Yes.
Speaker Change: The molecule, we easily offer the greatest opportunity to go after them.
Speaker Change: Isn't it.
Speaker Change: Reinsurance penetrated do you think that's really important given the strength of the signal that.
Speaker Change: I've been saying previously.
Speaker Change: Do you have left on them at all.
Speaker Change: Uh huh.
Speaker Change: All right.
Speaker Change: Around DDI lab.
Speaker Change: Beyond five and she is going to be combined with other drugs actually to maximize the potential of the mechanism.
Speaker Change: The efficacy seen in combination with either some of the factors.
Speaker Change: He focused on.
Speaker Change: Our drug discovery efforts.
Speaker Change: And we also I think in this abstract reports shapes.
Speaker Change: And angle.
Speaker Change: Maximizing that energy between PMT filed an NDA, which we think could lead to deeper responses. So as you said it.
Unnamed Speaker: So as you said, it's early days for this program. We still are enthusiastic about PRMT5 NTA. And I think, again, early days for our program but excited to participate in what we think is going to remain an important mechanism. Great. Very, very helpful.
Early days for this program.
Speaker Change: Are you asking about <unk>.
Speaker Change: Okay.
Speaker Change: Thank you again.
Speaker Change: As for our program.
Speaker Change: Thank you today's paying what we think is going to remain an important mechanism for cancer patients.
Speaker Change: Great very very helpful. Thanks for taking my question.
Matthew Hewitt: And we will take our next question from Matthew Hewitt with Craig Holland.
Speaker Change: Thank you Andrew we will take our next question from Matthew Hewitt with Craig Hallum. Please go ahead.
Unnamed Speaker: Please go ahead.
Unnamed Speaker: Hello, this is Talafon for Matt. I was wondering if you'd give us an update on the Predictive Toxicity Platform and if that is available to customers yet. Thank you. Sure, yep, I can comment on that. It is not. yet available sort of widely to our software customers. We're making now very big progress on expanding the number of targets that are part of the virtual panel. We're using that technology very extensively in our collaborations. And we expect to engage with customers in a sort of select way. As we always do with technology like this where partners sort of get early access to it, but it's not widely available yet.
Hello. This is tough on for Matt I was wondering if you'd give us an update on the predictive toxic toxicity platform and if that is available to customers yet. Thank you.
Speaker Change: Sure, Yes, I can't comment on that it is not.
Speaker Change: Yes available.
Speaker Change: Sort of widely to our software customers.
Making very good progress on expanding the number of targets that are part of the virtual panel.
Speaker Change: We're using.
Speaker Change: That technology very extensively in our collaborations.
And we expect to engage with <unk>.
Speaker Change: Customers.
Speaker Change: And just sort of slapped way as we always do with technology like this where.
Speaker Change: Partners sort of debt.
Speaker Change: Early access to it but it's not it's not widely available yet.
Yes.
Unnamed Speaker: Thank you.
Thank you.
Speaker Change: Yes.
Speaker Change: Thank you.
Brendan Smith: And we will take our next question from Brendan Smith with TD Co and please go ahead.
Speaker Change: And we will take our next question from Brendan Smyth with TD Cowen. Please go ahead.
Unnamed Speaker: Hi. Thanks very much for taking the questions. Just a quick one from kind of expanding on the earlier question. I guess looking earlier in the pipeline, and you have a few non-oncology programs kind of listed there, I'm just really wondering as you kind of continue to expand some of your collaborations, how should we think about kind of the prioritization of programs in different spaces as they near the clinic?
Speaker Change: Hi, Thanks, very much for taking the questions just a quick one from a kind of expanding on the earlier question I guess looking earlier in the pipeline.
Speaker Change: You have a few non oncology program kind of listed there I'm just really wondering as you kind of continue to expand some of your collaboration how should we think about kind of the prioritization of programs in different spaces as they near the clinic.
Unnamed Speaker: Is it fair to assume the non-oncology assets are still the prime targets for collaborations and your focus remains on oncology, or do you have plans today to eventually invest internally in actual clinical infrastructure, even for phase one, for some of those other areas yourself? Thanks very much.
Speaker Change: It faired within the non oncology assets there are still the prime targets for collaborations and your focus remains on oncology or do you have plans today to eventually invest internally in actual clinical infrastructure, even for phase one opt for some of those other areas yourself. Thanks very much yeah.
Unnamed Speaker: Yeah, I actually really like that question. Something we've been thinking about a lot. Obviously, there's still significant unmet need in oncology. We think that our platform allows us to design really great molecules with great properties for that particular set of targets in that therapeutic area. And so we remain committed to highly validated targets in that space.
Speaker Change: That question something we've been thinking about a lot.
Speaker Change: Obviously.
Speaker Change: There's still significant unmet need in oncology.
Speaker Change: It allows us to design really bite molecules like great properties, so that particular set of targets in that therapeutic area.
Speaker Change: <unk> remained committed to highly validated target in that space.
Unnamed Speaker: However, we also think that some of our work to come up with molecules for first-in-class targets in other large disease areas that include immunology, neuroscience, other huge disease areas that have very limited small molecule options, this is very important to us. And I think that we've been able to make significant progress on those undisclosed programs. In terms of how we think about development of those, we believe that we are very well equipped not just to develop compounds in oncology, we've got a really great team executing on our current cohort program, but we also believe that there is very strong opportunity for us to take a subset of programs in areas outside of oncology, into phase one studies, and potentially beyond.
Speaker Change: We also think that some of that left to come up with molecules with best in class target.
Large disease area and that includes.
Speaker Change: And the analogy.
Speaker Change: Euroscience other huge.
Speaker Change:
Very limited.
Speaker Change: Small molecule option this is Barry.
Speaker Change: And I think that's significant.
Speaker Change: Significant progress.
Speaker Change: It's close.
Speaker Change: And <unk>.
Speaker Change: In terms of how we think about it.
Speaker Change: We believe that we are very well, but it's not just to develop compounds in oncology.
Speaker Change: Great team executing on our current <unk> program, but we also believe there is.
Speaker Change: Still opportunity for us to take a subset.
In areas outside of oncology into phase one studies.
Speaker Change: Essentially yeah.
Unnamed Speaker: We think that some of the targets we're focusing on. And we have very clear value inflection points that will be apparent in Phase I very early on. And this comes from, I think, the validation of the pathways that they're in, where we know what the biomarkers and endpoints are that we can study in those Phase I studies. So it is not the case that we are restricting our clinical development to just oncology.
Speaker Change: Do you think that some of the targets like focusing on.
Speaker Change: Very fair value inflection points that will be inherent any phase one a very young yeah and this comes from I think the validation pathways that very well we know biomarker end points are that we can study in this phase one studies.
Speaker Change: It is not the case, but we aren't seeing a clinical development to Jeff oncology, we intend to pursue a select number of our non oncology assets HSA Salon and spa.
Unnamed Speaker: a select number of our non-oncology assets interfaithly. It's very helpful.
Speaker Change: Okay.
Speaker Change: Okay very helpful. Thank you.
Michael Ryskin: And we will take our next question from Michael Ryskin with Bank of America.
Speaker Change: Thank you and we will take our next question from Michael Raskin with Bank of America. Please go ahead.
Unnamed Speaker: Please go ahead. Hi, this is Sean, Kim on for Michael. Good morning. You guys talked about the reduced probability of hitting the milestones in 2024. But outside of the Novartis collaboration in the first half of 25, or even 2025, altogether, is that reduced probability mean that you're unsure those milestones would be hit in general? Or can we think of them as a bit just pushed back?
Speaker Change: Yeah.
Speaker Change: Hi.
Speaker Change: As John Kim on for Michael.
Speaker Change: Good morning, you guys talked about the reduced probability of hitting the milestones in 2024.
Speaker Change: But outside of the Novartis collaboration in the first half of 'twenty five or even 2025 altogether is that reduce probably the lady mean that you're unsure those milestones would be hit in general or can we think of them as a bit just pushed back.
Unnamed Speaker: Yeah, look, I don't want to say that any milestone that's in the future is a hundred percent certain, but I think we're trying to convey that our expectation is that those milestones will still be recognized next year rather than this year. But they're not, you know, until we get to the point, we're doing experiments, so we have to wait until the data comes through, and then we have the discussions with partners. But that's our expectation. The other factor, of course, is also, you know, when, you know, those elements of the Novartis collaboration, we start to get revenue recognized as well.
Yeah.
Speaker Change: I don't want to say that any milestone that's in the future is 100%.
Speaker Change: But I think we tried to convey that our expectation is that those milestones will be recognized next year rather than this year.
Speaker Change: Yes.
Speaker Change: Now until we get to the point, that's what we're doing.
Speaker Change: And so we have to wait until the data comes through it and then we have the discussions with partners.
Speaker Change: That's our expectation.
Speaker Change: The other factor of course is also you'll win.
Speaker Change: Louis elements of the Novartis collaboration we start to get revenue recognized as well.
Unnamed Speaker: I indicated in my prepared remarks that our expectation right now is that the drug discovery revenue contribution will be very small from that collaboration. And that's simply because of the timing, you know, when we start doing work on the projects and then to recognize the revenue. But equally, I hopefully convey that we think that that will be a significant contributor to our revenue next year, because by then, we'll have the project teams up and running, and we'll be executing the work on a number of programs in that collaboration. Gotcha. Noted. All right. I'll just keep it to one.
Speaker Change: As I indicated in my prepared remarks.
Speaker Change: Speculation right now is that the.
Speaker Change: Drug discovery revenue contribution will be very small.
Speaker Change: From that collaboration and that's simply because of the timing of when we start doing work on the project and then you recognize the revenue.
But equally.
Speaker Change: Hopefully convey that we think that that will be a significant contributor to our revenue next year. Because by then we'll have the approach exchanges up and running and we'll be executing the work on a number of programs in that collaboration.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Got you noted alright, I'll just keep it to one thank you.
Unnamed Speaker: Thank you.
Operator: And once again, if you would like to ask a question, please press the star and one on your telephone keypad now.
Speaker Change: Thank you and once again, if you would like to ask a question. Please press the star and one on your telephone keypad now.
David Lebowitz: And we will take our next question from David Lebowitz with Citi. Please go ahead. Good morning.
Speaker Change: And we will take our next question from David Lebowitz with Citi. Please go ahead.
Unnamed Speaker: John, I'm for David. Thanks for taking our question. Can you talk about the revenue recognition and pricing dynamics of a hosted contract versus a non-hosted contract post-execution? And how do these revenue recognition dynamics differ for a standard one-year contract versus a longer-term agreement? Thanks.
Speaker Change: Good morning, John on for David Thanks for taking our question can you talk about the revenue recognition and pricing dynamics of a hershey contracted versus the non hosted contract execution.
Speaker Change: And how did these revenue recognition dynamics differ for a standard one year contract versus a longer term agreement.
Unnamed Speaker: Great question. So the hosted contracts are recognized ratedly over the period of the contract. So if it is a one-year contract, then let's just say the ATV is a million dollars, then roughly $250,000 per quarter over that year. And if it's a three-year contract of a million dollars a year, roughly $250,000 per quarter for the three years.
Speaker Change: Great question.
Speaker Change: So the house.
Speaker Change: Hosted contracts are recognized ratably over the period of the cockpit. So it is a.
Speaker Change: Our new contract.
Speaker Change: Let's just say the ACB is $1 million roughly $250000 per quarter of that year and if it's a three year contract.
Speaker Change: Roughly $250000 per quarter for the three years.
Unnamed Speaker: An on-prem contract, where the licensed server is on the premises of customer, the revenue shifts to be substantially recognized in the period in which the contract is initiated. So, Paul Park would be, if it's a one-year contract that is an on-prem license, you could see as much as 80% of the revenue recognized in the period in which the license is signed. So that would be, using my $1 million contract, $800,000 in the quarter. Now, these numbers are gross generalizations. All of our contracts have maintenance components. So we're providing services, we're providing updates, we're making sure that the technology is running for the customer.
Speaker Change: On on Prem contract, where the license so that is all the premise as a customer.
Speaker Change: The revenue shifts to.
Speaker Change: Substantially recognized during the period in which the contract is in this year. So.
Speaker Change: All park would be if it's a one year contract that has long term license.
Speaker Change: You could see as much as 80% of the revenue recognized in the period in which the license side, so that would be using my a million dollar contract $800000 in the quarter.
Speaker Change: These numbers are gross generalization.
Speaker Change: All of our contracts have maintenance components. So we're providing services were providing updates we're making sure that the technologies right.
Unnamed Speaker: And so maintenance is recognized ratably as well. So this depends upon how much services component there is, that can shift things over to ratable as well. And then lastly, let's just say a three-year contract, as much as two-thirds of the revenue could be recognized in the period in which the contract is signed. But again, that depends on the balance between maintenance, services, and the actual software in the contract.
Speaker Change: While the customer and so maintenance is recognized ratably as well. So this depends upon how many how much services component there is that can shift to ratable as well.
Lastly, lets just say its three year contract.
Speaker Change: Is two thirds of the revenue could be recognized in the period in which the contract is signed but again that depends on the balance between maintenance services and the actual software in the contracts.
Unnamed Speaker: So all of these contracts are different, but there are some broad principles that you could use to thinking about recognizing... Very helpful. Thank you very much.
Speaker Change: All of these contracts different but those broad principles that can produce up to thinking about where she is asking about it.
Speaker Change: Very helpful. Thank you very much.
Unnamed Speaker: Thank you.
Operator: And I am showing no further questions at this time. That concludes today's call.
Speaker Change: Thank you and I am showing no further questions. At this time that concludes today's call you may now disconnect.
Operator: You may now disconnect.
Speaker Change: Yeah.